Admittedly, it hasn’t been the greatest start to October. The FTSE 100 dipped from 7,426 at the end of September to 7,077 on 3 October. That’s almost a 5% change in a matter of days. A week on, it was a third of the way back up at 7,186.
Markets have been looking a little rocky for months, and this recent wobble looks less bad than some of the previous ones. Rupert Thompson, head of research at Kingswood, said:
“This correction so far is rather smaller and shorter than the ones seen in May and August, both of which lasted around a month, saw declines of 6-7% and were followed by moves back up to the previous high.”
Thompson says the stock market is being dragged lower by the worry that the slowdown in the global economy is intensifying. The latest falls in the FTSE 100 were sparked by US manufacturing confidence falling unexpectedly sharply in September – hitting a 10-year low – plus a decline in service sector confidence, previously the bright spot for the US economy.
The weakness has been particularly pronounced in the UK, which is also having to contend with uncertainty around Brexit. Investors have been deserting UK assets – the latest data from global funds transaction network Calastone shows outflows from UK stock market and property funds for four consecutive quarters, with gathering momentum in the three months to the end of September.
So far, so gloomy. But the solution really isn’t to keep it under the bed. As an illustration, over the past 10 years, holding cash would have lost you 2.5% a year (source: Barclays Equity Gilt Study). In contrast, the UK stock market has returned 5.8% a year. Past performance is no guide, but either way, cash is likely to be a bad strategy for long-term investors in all but the most apocalyptic of scenarios. It doesn’t beat inflation and loses you money in real terms.
The experts have strategies for difficult times. Richard Pearson, director at Selftrade from Equiniti, suggests reviewing your portfolio to check it’s not all pointing in one direction; technology, or Asia, for example.
“If you’re sitting on gains it is never wrong to realise some of those gains and re-invest in another stock or fund to help diversify your risk.”
(To ‘realise gains’ is to sell your stocks at more than you bought them for. Gains means growth.)
While investors shouldn’t be making any drastic changes, he believes they may want to add in something a little different – perhaps gold or infrastructure. These assets may work in a different direction to conventional stock market investments and could protect your portfolio. Pearson suggests funds such as the VT Gravis UK Infrastructure Income Fund, or First State Global Listed Infrastructure Fund. The BlackRock Gold and General Fund is an option for gold bugs.
Adrian Lowcock, investment director at Willis Owen, suggests the Newton Real Return Fund. This fund prioritises capital protection (though it’s not guaranteed) and looks to deliver returns of 4% above cash per annum. The fund invests in two parts: a core element which invests in shares and bonds with a long-term perspective and low turnover; as well as weightings in cash, government bonds and derivatives in order to reduce risk. He also likes Trojan Income, which has a conservative investment philosophy and seeks out high quality companies that can produce steady, long term income and capital growth.
Both Lowcock and Pearson urge investors not to panic sell. Lowcock says:
“Trying to predict market movements in the short term is a high-risk strategy as it is impossible to know where the sell-off may end and what the bottom may be. October has a reputation for being a volatile month and seems to have delivered on its reputation already in its first week.”
Don’t put your cash under the bed, not least because it will probably get really dusty. Remind yourself why you are invested. Investing should be for the longer term, at least five years, and in reality most of us are saving for retirement. In that context the odd short-term wobble really doesn’t matter too much, even if it feels painful at the time.
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